The V(D)J recombination process that assembles functional immunoglobulin and T cell receptor genes in lymphoid cells is essential for generating the diversity of the immune response. The reaction is now known to occur in two stages. In the first stage, specific double-strand breaks are made at the target sites. The ends of the coding DNA sequence at these breaks are always joined back on themselves as DNA hairpins. Based on cellular experiments, this unusual type of cleavage was known to utilize the products of the RAG1 and RAG2 genes, but it was not clear how they functioned. The later stages of recombination are less specific; the final joined products are made with the use of many factors also involved in the repair of radiation damage. We have now reproduced the first cleavage reaction in a biochemically defined reaction requiring only the purified RAG-1 and RAG-2 proteins. A DNA fragment containing the recognition signal sequence (RSS) is cut to make a hairpin coding end and a blunt signal end, just as in vivo. Furthermore, in more demanding reaction conditions, cleavage requires a pair of RSSs of the different types that are needed for recombination in vivo. Thus the RAG proteins alone contain all the information for the specificity of V(D)J recombination. We have also found that the hairpins are made in a reaction very similar chemically to transpositional recombination. An evolutionary relation between V(D)J recombination and transposable elements had previously been suggested, and our results provide the strongest data so far in support of this idea.